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December 16, 2007

Economist's View - 3 new articles

Carbon Consumption Caps

Judith Chevalier argues that, in the absence of an international agreement to limit greenhouse gas emissions, a carbon consumption cap is "a more limited but still useful approach":

A Carbon Cap That Starts in Washington, by Judith Chevalier, Economic View, NY Times: The United Nations conference on climate change wrapped up in Bali ... without a firm commitment from the United States or China to reduce emissions of ... greenhouse gases. While a binding global agreement would be the best way to cut back on those emissions, a more limited but still useful approach is available, and it is wending its way through Congress.

In its current version, the Lieberman-Warner Climate Security Act, as the bill is known, would cap American carbon consumption through a tradeable permit plan. ...

One goal of a tradeable permit system is to force consumer prices for goods to reflect the harm that the production of those goods causes the planet. For example, if a television were made using a high-emission process, the factory would have to buy many carbon permits, driving up the TV's price. A television made in a low-emission factory would require fewer permits, lowering its relative price. Consumers, of course, would have an incentive to choose the TV from the low-emission factory, and all factories would have an incentive to lower emissions.

A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the "leakage problem": just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.

A provision in the current version of the Climate Security Act links responsibility to carbon consumption, not production. ... The provision requires that importers of goods from countries without carbon caps obtain permits for the emissions resulting from the goods' production. While this requirement could be used to protect American jobs from foreign competition, if handled equitably, it could provide an elegant solution to the leakage problem.

If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.

Of course, such a plan would have an immediate cost for Chinese producers and American consumers. Chinese production methods are now much more carbon-emission-intensive than American methods, so the plan would probably raise the average price of Chinese imports. The alternative, however, is to try to force the Chinese to adopt binding carbon caps similar to those considered in the United States. But that would also raise the Chinese imports' price. Moreover, Chinese adoption of carbon caps would apply to the whole economy and would be much more costly for China; an American carbon consumption permit system would shield the Chinese domestic sector.

"The best policy ... would be to have all countries take on binding emissions caps under an international agreement," said Nathaniel Keohane, director of economic policy and analysis at Environmental Defense... "But we have to recognize that's not going to happen overnight." In the meantime, he said, the United States and other developed countries "need to take the lead." He called carbon consumption caps "a good first step."

"From an environmental point of view," Mr. Keohane said, "it would ensure that the pollution we cut here at home doesn't simply end up coming out of a smokestack somewhere else. It levels the playing field for American companies in the global economy. And it also helps us move toward a truly international system, by providing an incentive for developing countries to take on binding caps of their own."

The carbon consumption provision will face scrutiny under current trade agreements, but there is sound logic for including it in any emissions legislation. Most important, it would eliminate an excuse for doing nothing.

Are U.S. Threats to Restrict Trade with China Credible?

Simon Evenett argues that if we enter a trade war with China, we will either have to impose WTO-illegal restrictions, or settle for policies with more bark than bite. Thus, a trade war means "either Western policymakers shredding their credibility in front of the domestic interests calling for action against China or ruining their reputations as good WTO members":

Trade frictions with china: Do western policymakers have an end game?, by Simon J Evenett, Vox EU: Starting a fight is often a lot easier than ending one. Over recent months policymakers in the European Union (EU) and the United States have escalated their denunciations of Chinese trade practices, product safety, and currency regimes. Some measures against Chinese exports have been taken--and more have been threatened--if China does not respond. ...

In the US criticisms of China's trade and currency policies have been sustained over the past few years, especially from the United States Congress. As a result, the Bush Administration set up a cabinet level dialogue with their Chinese counterparts. This dialogue has not delivered reforms in China at the pace sought by Congress. Consequently, measures have been proposed in recent months in both houses of Congress that would permit the application of anti-subsidy measures to both "non-market economies" (of which China is one) and to trading partners found to be manipulating their currencies. The House bill had 113 sponsors from both political parties. ...

[I]n October 2007 the US Department of Commerce recommended imposing anti-subsidy duties on imports of glossy paper from China. This is significant, not only because China had heretofore been exempt from anti-subsidy actions, but also because the form of subsidy relates to the terms upon which Chinese banks typically lend to Chinese firms. This widespread nature of this "subsidy" could put a broad range of Chinese exports at risk of high anti-subsidy tariffs in the US.

Before the recent appreciation of the euro the EU had tried a less confrontational approach to its trading relations with China. The EU's own Trade Commissioner, however, recently argued that Europe's approach "is no longer delivering sufficiently credible results," and proposed greater resort to anti-dumping, anti-subsidy, and safeguard actions against Chinese imports and to WTO Dispute Settlement procedures. ...

Given these developments how should the ratcheting up of Western criticism of trade and currency practices be interpreted?

First, there are good reasons why the Chinese may decide that Western words may not be followed by that damaging deeds--at least not in the near-term. ... With respect to the threat of harsh steps by the U.S. Congress, China might argue that its tough line to date has already seen the relevant Congressional bills watered down (to garner more support among US Congressional members) and that holding out further will obtain similar results. ... Western threats to Chinese exporters appear hollow.

Where Chinese exports are at risk is through the widespread application of trade defence instruments, especially anti-subsidy actions that target those subsidies that are thought to be persuasive in the Chinese economy. The recent U.S. duties on Chinese exports of glossy paper may be a harbinger of things to come. China's principal line of defence here is that tariffs on unfairly traded goods also adversely affect the profitability of Chinese investments and the supply chains that are operated by Western companies. These companies plus corporate buyers in the West will have a strong interest in opposing the application of trade defence instruments to many Chinese exports. Moreover, under WTO rules demonstrating that an export is subsidised doesn't alone allow tariffs to be imposed, a threshold level of injury to a domestic injury must be met before China's exports can be targeted for extra duties.

As far as WTO dispute settlement cases against China are concerned, much expert opinion is doubtful of a case against the Chinese exchange rate regime finding favour at the WTO. Cases concerning the implementation of China's accession commitments are another matter entirely. However, here no doubt China has learnt from the experience of Japan, which successfully defended itself against a number of controversial cases brought by the US in the early 1990s. Moreover, China will no doubt have learnt about how to delay compliance with WTO Appellate Body rulings from the very trading partners that are now criticising its trade and currency practices, namely, the EU and the US. So it is difficult to see much Western satisfaction in the near- to medium-term to bringing dispute settlement cases against the Chinese.

Given all of these considerations and potential dead-ends, where does this leave EU and US trade policymakers? Should they persist on their current path, they essentially face a choice between a rhetorically tough campaign against Chinese exports where the almost-inevitable piecemeal action highlights the divergence between their words and deeds or--through some (unwelcome) political convulsion--a blatantly WTO-illegal across-the-board restriction on Chinese exports could be imposed. These two choices amount to either Western policymakers shredding their credibility in front of the domestic interests calling for action against China or ruining their reputations as good WTO members. Given the end game's unpalatable consequences, some serious thought ought to be given in Western capitals as to how much political capital should be committed to escalating trade frictions with China in the first place.

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